Even with the dollar’s recent slump, the yen is unable to get off the floor too as Japan continues to suffer heavily from the Middle East conflict. The closure of the Strait of Hormuz is hitting Asian countries hard and Japan is one to be impacted quite badly in all of this. That has already seen the country push for a release of emergency oil reserves, with a second round likely to follow next month.
The fact that Japan relies so heavily on oil imports is a major dampener for the economy, not least with surging energy prices. That will feed into more pain for households and businesses as import cost inflation jumps. And that is another negative factor for the yen currency, amid everything else that has gone wrong before the war i.e. the Takaichi trade.
As such, JP Morgan continues to hold a more bearish view on the currency in the medium-term. The firm notes that:
“We think that higher energy prices amid heightened Middle East tensions would increase the downside pressure on JPY through various channels.
Given that, we maintain our medium- to long-term bearish view on the JPY and keep our USD/JPY year-end target unchanged at 164.
First, as Japan is highly dependent on imported energy, rising energy prices are likely to increase import costs and widen the trade deficit, and concerns over these developments could trigger JPY selling.
Second, the recent rise in energy prices has lifted inflation concerns, pushing central banks toward a more hawkish stance and leading markets to price in further rate hikes, while expectations for BOJ rate hikes have not risen much.”
On the final point and the BOJ, the central bank won’t like this mix of inflation pressures feeding through into the real economy. Policymakers want inflation to be driven by stronger wage pressures and they are still seeing that for the most part. However, higher energy prices is now going to feed cost push inflation and that is not the kind that the central bank would like to see get mixed into the overall price outlook.
In other words, they now have a bad cocktail mix that will need to be filtered out down the road
